Bharat 22 ETF - Why should you invest?

On August 04, 2017, the Honorable Finance Minister, Mr. Arun Jaitley announced the launch of Bharat 22 ETF. This announcement was in
line with the Budget Speech of 2017-18, wherein the Finance Minister had
promised to use ETF as a vehicle for further disinvestment of shares.

Now that
there is a variety of ETFs already existing in the markets, what is important
to note is how this newly launched ETF different from the existing one.

The
Highlights

Moreover, the highlight of this
ETF is the unique combination of the 22 names of Central Public
Sector Enterprises (CPSEs), Public Sector Banks (PSB) & strategic holdings
of SUUTI. Thee names are spread across six sectors namely Basic Materials,
Energy, Finance, FMCG, Industrials and Utilities.

This ensures that the
underlying index blends sectors with secular growth prospects (FMCG and
utilities), and cyclicals (energy, metals, industrials).

This composition is in stark
contrast to the previous tranches of CPSE ETFs wherein nearly 85% of the
portfolio consisted mainly of Energy followed by Metals and Financial Services.
As a means to improvise on this past scheme of arrangement, a sector level cap
of 20% and a stock level cap of 15% has been implemented in Bharat 22 ETF.

Why
should you invest?

Take
part in India’s growth story..!

Most of the stocks in the
Bharat 22 portfolio have played a major role in building India’s foundation and
its economic growth. Stocks like Larsen & Toubro have the highest weightage
at 17%, followed by ITC at 15.2%, SBI at 8.6%, Power Grid Corporation at 7.9%
and Axis Bank at 7.7%. According to the finance minister, the sectors have been
selected keeping in mind the sectoral reforms in each of them, which have had
direct impact on the valuations of the stocks.

Diversify
your investment..!

The Bharat 22 ETF is not restricted to any
particular sector of theme. Majority of the portfolio, almost 90%, in the
Bharat 22 index is invested into large-cap stocks, which brings stability and
lower volatility to the portfolio.

The ETF also gives investors the chance to
get incremental returns by investing into some high quality mid-caps and
small-cap stocks, which form 8% and 2% of the portfolio, respectively.

Just so
that the portfolio is well diversified, the Bharat 22 index has capped the
weightage of each stock to 15% and the sectoral exposure limit is set at 20% to
avoid undue over-exposure.

Invest
easily..

Although ETF are mutual funds, they are more liquid in
nature as they are traded on the stock exchange. Investors can easilybuy and
sell units of the Bharat 22 ETF on the stock exchange on a real time basis; the
value of the ETF unit will rise or fall in line with the value of the 22
underlying stocks.

Since the stocks that the Bharat 22 will invest into are
extremely liquid, it is expected to bring a large investor base, which will
also reduce transaction cost. Anyway ETF’s bear a lower expense ratio i.e.
about 0.5% - 1% since they are passively managed, this will add to your corpus
in the long run.

Get
superior returns..!

Although the Bharat 22 ETF is new,back tested
returns show that this index has not only outperformed the BSE Sensex but also
some of the best performing large cap funds. Since March 2006 (last 10 years),
the Bharat 22 Index delivered a return of 12.9 %, while the Sensex returned
9.2%. During this period your investment amount of Rs 1 lakh would have grown
to Rs 3.4 lakhs with Bharat 22 ETF and Rs 2.4 lakhs only in the BSE Sensex.

The
dividend yield offered by the Bharat 22 Index was also higher at 2% (FY
2016-17) compared to 1.3% offered by the BSE Sensex, which will adds to your
overall returns.

The government’s earlier offering of the CPSE ETF has
also returned handsomely to the investors, delivering 17.5% over the last one
year and has been successfully raising money from investors with an asset base
of about Rs 5800 cr. They have also managed to curtail the expense ratio of the
fund at 0.07% only compared to 2% charged by most equity mutual funds.

There are high chances that the government may offer a
discount to market price for the Bharat 22 ETF. This fund is best suited for
you if you want to take part in the India growth story by investing across a
good blend of public and private sector companies.

Conclusion

The companies which form part of the Bharat 22 indexare
largely leaders in their respective categories with robust fundamentals. Given
that the ETF will have one of the lowest expense ratios in the industry; this
ETF provides a cheap and easy way to access the India growth story. One can
easily consider the Bharat 22 ETF to be a part of one’s core portfolio for meeting
long termfinancial goals.